Chapter 20 - Newer Life Policies Flashcards
Newer Life Policies
Interest Sensitive Whole Life: Also known as Current Assumption Whole Life - allows a policy owner to share in the insurance company’s investment success (if any). They share the risk as well. There is a minimum guaranteed cash value. The premium may rise or fall with the success of the investment. After several years, the premium could adjust. There is usually a cap on premiums going up. In lieu of paying a higher premium the policy owner may choose to pay the same premiums but lower the face value.
Variable Life: sometimes called Variable Whole Life - very risky. The policy owner controls chooses from a wide variety investment accounts where to invest in the money. The premium is fixed so there is no guarantee regarding the cash value but as long as the premiums are paid there is a guaranteed death benefit. There is no minimum guarantee of the cash value.
-The insurance agent who sells these products must have a securities license from the National Association of Securities Dealers (NASD) issued by the Federal Financial Industry Regulatory Authority (FINRA). The insurer must also give the applicant a prospectus (explaining the investments). The securities are regulated by SEC, state security regulators/commissioners/directors.
Universal Life - This is a term policy with a cash value account. The premium payments go into an interest sensitive cash account. Each month the insurance company will deduct a mortality charge from the cash value account to cover the cost of the Term coverage. The premium will be flexible then but rather than out of pocket, the hope is the cash value account is covering the premium. Premium will likely increase to cover the increased mortality benefit. The company chooses the investments. There is a minimum guaranteed cash value return.
-A whole life policy is bundled up, you don’t see where the premium goes (pay company expenses, increase the cash account, pay death benefits). The universal life policy is “unbundled” the insurer discloses in an annual report where the premium went.
- The policy owner can withdraw part of all of the cash account. Under the COST RECOVERY RULE, only the increased value of the cash value account is subject to taxes.
Variable Universal Life - combine variable and universal. Term policy. The policy owner can choose the amount of premium, death benefit and the cash value amount, then chooses the investment vehicle. There is no guaranteed return. If investments do poorly the policy owner stands to loose it all. Attractive to high tax bracket individuals and the risk takers.
